US on brink of deflation as world economy slows

The most widely watched U.S. inflation indicator, the seasonally adjusted all-items CPI for urban consumers, fell in November at an annual rate of 0.23 percent.

The decrease was small enough that it will hit the headlines as no change, based on the rounded monthly data reported in the press release from the Bureau of Labor Statistics. (All inflation data in this post are month-to-month changes stated as annual rates, based on the three-decimal version of the data released by the Cleveland Fed.) November marked the second consecutive month of negative inflation, following a decrease of 0.96 percent in October.

While the headline all-items CPI fell, measures of underlying inflation remained in the very low positive range. The core CPI from the BLS, which covers all items less food and energy, rose at a 2.10 percent annual rate in November, up from 1.69 percent in October. The Cleveland Fed’s 16 percent trimmed mean inflation rate came in an an annual rate of 0.99 percent for November, down a little from 1.36 percent in October.

All of these are very low numbers to be seeing at a time when the world economy is slowing.

The EU, by all indications, is already in recession and is likely to stay there next year, even if the latest euro rescue plans succeed. At the same time, the Chinese economy is slowing as that country’s housing bubble unwinds, exports slow, and direct foreign investment turns negative. Brazil has just reported its first quarterly GDP decrease in several years. India’s central bank has put interest rates on hold, despite high inflation, as industrial output falls.

The U.S. economy itself, according to Q3 data, is growing just enough to prevent its large output gap from getting even larger.

It is interesting to compare the latest U.S. inflation data with those from November 2007, the last month before the economy entered its previous recession...